Spin-off Extravaganza (OTIS, MSGE, IAC/MTCH) w/ Richard Howe, StockSpinOffInvesting.com (Episode 29)

Episode Summary

Executive Summary: Rich Howe and Brandon discuss a slate of spin-off and special-situation ideas, focusing on valuation gaps, catalyst timing, and downside protection. They debate MSG Entertainment, Otis, Carrier, Homet Aerospace, and the Ecolab/ChampionX split-off, then spend the most time on IAC’s imminent Match Group spin-off. The episode also covers forced-selling and short ideas, including Contour Brands, Hertz, and Whiting Petroleum, and closes with broader lessons on risk management, cash, and learning trading methods.

Main Topics: Spin-off idea pipeline and recent corporate actions (Priority: 5/5): Rich surveys recent and upcoming spin-offs, noting that U.S. announcements have been sparse, but several completed situations still offer lessons. He highlights Sharp, MSGE, Carrier/Otis, Ecolab/ChampionX, Arconic/Homet Aerospace, and the upcoming IAC/Match separation. Madison Square Garden Entertainment valuation thesis (Priority: 5/5): The discussion centers on MSGE’s sum-of-the-parts value: large net cash, valuable lease income from the Knicks/Rangers, air rights, the Christmas Spectacular, and other assets. Rich argues the stock trades below conservative intrinsic value with meaningful downside protection. Otis and Carrier as contrasting UTX spin-offs (Priority: 4/5): Otis is framed as the higher-quality, more defensive elevator/escalator business with strong service revenue and secular urbanization tailwinds, but Rich says it is now fairly valued. Carrier is more cyclical, levered, and priced with more caution despite attractive long-term prospects. IAC/Match spin-off and holding-company mispricing (Priority: 5/5): Rich explains why IAC appears deeply undervalued ahead of Match Group’s spin-off, with the parent’s implied stub value negative even after accounting for public stakes, cash, and private assets. He sees a favorable long/short structure using IAC and Match. Split-off arbitrage and odd-lot provisions (Priority: 4/5): The Ecolab/ChampionX transaction is used to illustrate how small investors can exploit odd-lot provisions and share exchanges in split-offs to lock in low-risk returns. Rich compares this to similar opportunities in Danaher/Envista and Eli Lilly/Elanco. Forced selling, shorting, and event-driven special situations (Priority: 4/5): The episode covers shorting around ETF rebalancing and mandated selling, especially Contour Brands after a dividend suspension, and broadens to shorting obvious but dangerous microcap shorts like Zoom confusion names, Hertz, and Whiting. Portfolio positioning and process improvements (Priority: 3/5): Rich says he is carrying elevated cash, waiting for volatility and opportunities, while trying to improve his trading/technical-analysis skillset through books like Market Wizards and Trend Following.

Key Arguments: Spin-offs often create mispricings because investors and index funds are forced sellers or are slow to value the new structure correctly. MSGE can be valued conservatively by combining cash, lease income, air rights, hospitality investments, and entertainment cash flows, producing a fair value above the market price. Otis is a high-quality business, but its current multiple already reflects much of its quality; it is no longer a compelling bargain. Carrier is attractive but materially more cyclical and levered than Otis, so the risk/reward is more sensitive to a downturn. IAC is especially interesting because the market appears to underappreciate its asset mix and management quality while the Match spin-off creates a clear catalyst. Odd-lot provisions in split-offs can create near-arbitrage returns for small holders because they may avoid prorating and can exchange into the new security at a discount. Shorting microcaps and event-driven names can work when the setup is clearly detached from fundamentals, but position sizing must be tiny because upside can be unlimited before the thesis resolves. Cash is valuable in uncertain markets because it allows investors to survive volatility and act when special situations become compelling. A DCF is useful not as a precise answer but as a way to test whether the market’s embedded assumptions are too pessimistic or too optimistic. Market Wizards-style learning is useful because there is no single correct style; investors should find a process that fits their temperament.

Data Points: MSGE net cash per share: $61 - Rich says Madison Square Garden Entertainment had $61 per share of net cash at spin-off. MSGE low trading price at spin-off: $59 - He notes the stock traded as low as $59 shortly after separation. MSGE recent trading price: $79 - Referenced as of yesterday during the discussion. MSGE annual lease payment from Knicks and Rangers: $39.2 million - Lease-like annual payments backing the MSGE thesis. MSGE lease value at 4% cap rate: ~$980 million - Rich capitalizes the lease stream using a 4% cap rate. MSGE air rights: 1 million to 3 million square feet - Estimated air-rights ownership discussed as a latent asset. MSGE air rights valuation: $225 per square foot - Used to estimate a minimum value for air rights. MSGE air rights implied value: $225 million minimum - Low-end estimate of the air-rights value. MSGE Tau Hospitality investment: ~$200 million - Valued at acquisition cost in Rich’s sum-of-the-parts view. MSGE total asset value: ~$3 billion - Aggregate value of assets before applying a discount. MSGE fair value estimate: ~$99/share - After a 20% discount to asset value. MSGE adjusted operating income: $68 million - From the Form 10, used in an earnings-based valuation. MSGE annualized adjusted operating income: $136 million - Annualized from the disclosed quarter. MSGE earnings-based fair value: ~$118/share - Using a 10x multiple on annualized AIO and adding cash net of debt. Otis valuation estimate: mid-$50s/share - Rich’s fair value range for Otis after analyzing comps and DCF. Otis EBITDA multiple: 16x - Current trading multiple mentioned for Otis. Otis free cash flow multiple: 25x - Current trading multiple mentioned for Otis. Carrier revenue decline in GFC: ~20% - Rich says revenue declined roughly 20% during the financial crisis. Carrier operating income decline in GFC: ~34% - Used to illustrate cyclical sensitivity. Carrier service/aftermarket mix: ~28% - Recurring revenue component of Carrier’s business. Carrier net debt to EBITDA: ~4.5x - Rich cites leverage as a major risk factor. Carrier pro forma interest rate: ~3% - Debt was described as very attractively priced. Carrier average debt maturity: ~14 years - Indicates no near-term maturity wall. Carrier valuation range: $25-$30/share - Rich’s estimated fair value range versus a stock price around $20. Carrier assumed earnings: $1.21 this year - Rich’s normalized/forward earnings assumption during the downturn. Carrier prior-year earnings: ~$2.00/share - Referenced as normalized earnings last year. ChampionX exchange discount: 10% - Split-off offered Ecolab shareholders a discounted exchange into the new company. Odd-lot threshold: fewer than 100 shares - Small holders were not prorated in the split-off. Ecolab/ChampionX profit example: ~$1,100 - Potential near-riskless profit from the exchange and hedge. Danaher/Envista exchange discount: 7% - Another split-off example mentioned. Danaher/Envista profit example: ~$1,000 - Approximate profit from the arbitrage setup. Elanco split-off profit example: ~$1,500 - Estimated profit from Eli Lilly’s animal health split-off. Homet Aerospace fair value: $30-$35/share - Rich’s normalized valuation estimate after the Arconic split. Homet Aerospace EBITDA multiple: 13x next-year EBITDA - Current valuation noted as a starting point for the aerospace business. Homet Aerospace normalized valuation multiple: 10x EBITDA - Used for Rich’s more conservative long-term estimate. IAC Match ownership stake: ~80% - IAC’s ownership of Match Group before the spin-off. IAC Angie Home Services stake: 84% - Public stake used in valuing the holding company. IAC implied stub value: -$1.4 billion - Public assets plus market value still leave the holding company at a negative implied value. IAC cash: $2.3 billion - Expected cash balance after the Match spin-off. IAC Angie value: $5 billion - Rich uses this as a rough public-market value estimate. IAC fair value after spin-off: $112/share - Rich’s broader sum-of-parts estimate including Vimeo, Dotdash, Care.com, cash, and VC holdings. IAC conservative fair value range: $87-$112/share - Based on public stakes and more visible assets. IAC implied post-spin purchase price: ~$70/share - Value of the IAC/short Match structure at current prices. IAC current price referenced: $69.49 - The quoted market price during the interview. Match short borrow cost: 12% - Rich notes the cost to short Match is elevated but manageable. Contour Brands dividend: $2.24/share - The dividend that made the stock attractive to dividend ETFs before the cut. Contour Brands dividend yield: 10%-12% - Yield level that attracted income investors and ETFs. SDY ownership of Contour Brands: over 9 million shares - ETF forced seller holding around the time of the dividend suspension. SDY share of Contour Brands float: ~16% of shares outstanding - Indicates how large the forced-selling flow could be. Zoom short entry price: $9.80 - Rich’s average short price in the ticker-confusion trade. Zoom peak price: over $30/share - Illustrates the danger of obvious shorts before they resolve. Shorting positions size: 1%-2% of portfolio - Rich’s stated cautious sizing approach for risky shorts. Whiting bond price: 15 cents on the dollar - Used to infer severe impairment to common equity. Whiting implied equity value gap: ~95% lower - Rich’s estimate of how much lower equity should be versus current trading levels. Russell 2000 move: -5% - Mentioned near the end as a possible sign of market weakness.

Pivotal Quotes: "the sum of the parts is worth more than what the stock was currently trading at" — Rich Howe: Core thesis for Madison Square Garden Entertainment and several other holding-company/spin-off situations. "I think the world's going to return to normal" — Rich Howe: His macro assumption underpinning live entertainment and aerospace recoveries after COVID disruptions. "you basically buy IAC, buy, call it, one of IAC, and then you short 2.37 shares of match" — Rich Howe: Describes the long/short structure to isolate post-spin IAC value ahead of the Match separation.

Implications: The episode suggests spin-offs and special situations can still produce mispricings, especially when catalysts are imminent and forced selling distorts prices. It also highlights the need for cash, catalyst awareness, and strict risk control on shorts and arbitrage trades.